Former Jefferies LLC managing director Jesse Litvak, on trial for defrauding clients on the price of mortgage bonds, is finally getting to present the evidence that he believes will keep him out of prison — testimony from his hand-picked expert witnesses.
After prosecutors finished their case Thursday, Litvak's defense team started presenting its version to the jury in federal court in New Haven, Conn. The witnesses are expected to explain that bond traders are sophisticated market professionals backed by substantial research capabilities and are likely to be skeptical about statements made about pricing during negotiations.
Phillip R. Burnaman II, a former portfolio manager at ING Bank, testified that he managed a $500 million portfolio at ING and has conducted thousands of mortgage-bond trades. He said he always works to verify information before completing a transaction.
"I'm the captain of my ship, and if I make a decision on information, I want to make sure that information is good," Burnaman said.
As his first trial in 2014, Litvak wasn't permitted to present such expert testimony, but a federal appeals court reversed his conviction, opening the opportunity to bolster his case. At this trial jurors will hear that statements made by bond traders in negotiations are akin to those made by car salesmen when say they can't sell for less because they’re already losing money on the deal, Matthew Schwartz, a former federal prosecutor who isn't involved in the case, said.
"No one believes it when the car salesman says that," said Schwartz. "Litvak's argument is that the secondary mortgage-backed security market is exactly the same. Market participants buy or sell the securities they want at the price they agree upon, regardless of the profit to Litvak."
Burnaman also testified that it is common for bond traders to lower bids in an effort to get a better price.
"It's a bit like playing poker and bluffing," said Burnaman, who is now chief risk officer with hedge fund Dendera Capital LP.
Yet even armed with his experts, Litvak's argument may not lead the jury to a favorable conclusion, as the government doesn’t need to prove that his lies led investors to change their behavior, said James Cox, a professor with Duke University School in Durham, N.C., who specializes in corporate and securities law.
"A fact is material and people go to prison for telling material lies by simply making a statement where the investor says, 'Let me think about that — Oh it doesn’t change my mind,'" Cox said in an interview with Bloomberg Radio. "All it requires is that the investor pause over the information."
The arrest of Litvak in January 2013 signaled the beginning of a crackdown by federal authorities on shady negotiating tactics used by bond traders. Since he was charged, at least six other traders have been prosecuted over similar allegations, while dozens of other have left their jobs or have been forced out. Last month, a former Cantor Fitzgerald & Co. trader was indicted.
Litvak and the other traders who have been charged are accused of overstating the prices their companies paid for a bond in order to induce customers to pay more, or understating what buyers agreed to pay in order to get clients to sell the bonds for less.
The case is being closely monitored by participants in the market, especially those involved in other cases. Two former Royal Bank of Scotland Group employees who admitted guilt to similar charges can withdraw the pleas if Litvak wins, and three former Nomura Holdings Inc. dealers are scheduled to go on trial later this year.
Litvak's ability to use experts will likely force the jury to decide whether the prosecution or defense witnesses are more credible, said Donald Hawthorne, a partner at Axinn Veltrop & Halk whose practice focuses on complex financial instruments.
"The jury will look at people and they will believe what they believe," Hawthorne said.